Question

Stock problem. A stock just reported earnings of $5.00 per share and just paid a dividend...

Stock problem.

A stock just reported earnings of $5.00 per share and just paid a dividend of $2.6 per share. Investors require a 11% return to invest in this company, and the company makes a return of 8% on investments. Find the PVGO. Keep 4 decimals in your growth rate calculations (for example, 10.12%), and then round your answer to 2 decimal places.

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Answer #1

PVGO = CUrrent Price of Stock with growth - CUrrent Price of stock without growth

Retention Ratio = Retained amount / EPS

= [ $5 - $2.6 ] / $ 5

= $ 2.4 / $ 5

= 0.48

Growth Rate = Retention Ratio * Ret on Equity

= 0.48 * 8%

= 3.84%

Current Price with Growth:

= D0 ( 1+g) / [ Ke - g ]

= $ 2.60 ( 1 +0.0384) / [ 0.11 - 0.0384 ]

= $ 2.60 (1.0384) / 0.0716

= $ 2.6998 / 0.0716

= $ 37.71

CUrrent Price without Growth:

This measns entire earnings paid as DIvidend

= Dividend / Req Ret

= $ 5 / 11%

= 45.45

PVGO = 37.71 - 45.45

-7.75

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